M&A
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Managing Startups: Best Posts of 2012
Here’s a great recap of some of the best writing in 2012 on startups.
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Do you need a Big Law Firm to sell your company (or buy one)?
I had lunch today with a client who was recently pitched by a well-known partner at a Big Law Firm. The pitch was pretty simple – it was basically “You need a large firm to sell your company.” (The client has $5M+ in revenue and about 60 people.) And so the client – a new client – asked me: do I really need a Big Law Firm to sell my company?
My first reaction was to swear – inside my head. Big Law Firm people persist in pitching this one, and it drives me nuts.
And so we spent a little while talking about how Big Law Firms really work, and about how their partners make their money, and all in all it was a terrific opportunity to get to know the client better, to tell him more about my background, and to pass along some hard-won experience from Big Law Firm life. I know quite a bit about this area because I used to be at a large firm – two, actually – and while there I spent a lot of my time buying, selling and financing companies, both large and small, tech and otherwise.
In any event, this is all by way of prologue to explain how the Big Law Firm model relates to who you should have on your deal:
1. Partners at Big Law Firms make much of their money using your deal to teach their recruits how to be lawyers.
This is not as awful as it sounds – those recruits generally have good materials to work with, and are often pretty smart and resourceful. But they are often quite unsupervised (I often was) and are often lacking in common sense or business street smarts. So even though you will often meet the named partner at the beginning of the process, pretty soon he or she will inevitably disappear, leaving you with Junior Ranger. That will usually be fine. But sometimes it won’t be. And yes, these are great situations to be involved in as a lawyer when you’re experienced because it tends to make your life easier when there is someone inexperienced on the other side. I see this routinely when I deal with Big Law Firms.
2. Even a mid-level associate at a Big Law Firm can cost more than an experienced lawyer at a small firm. And they overuse resources.
This doesn’t need a lot of elaboration. But by way of comparison, my rates are considerably lower than the rates charged by mid-level associates at Big Law Firms. And unlike those firms, we don’t (and many small firms don’t) raise our rates every year.
Also, when junior lawyers run deals, they tend to run around asking other people for input and help, so you tend to see other names on the billing reports – lawyers who are more experienced, and therefore more expensive. And perhaps not very sensitive to the cost consciousness of the client, whom they’ve never met. This can escalate costs. The billing partner has the ability to write time off the file if the pre-bill looks out of whack, but that’s tricky, because lots of write-offs degrade his or her numbers, and create the impression of a poor manager (which many of them are). And of course, given the financial pressures of the Big Law Firm life, there is often a lot of reluctance to write time off without at least trying to get the client to pay.
3. You’re selling your company, not performing rocket surgery.
Part of the conceit that drives the Big Law Firm fiction that their skills are needed in the purchase and sale of typical tech businesses is that the work is complicated and difficult. It isn’t. Far from it – this is bread and butter work for any serious tech-oriented business lawyer, and there are rarely many novel twists in any particular deal. More to the point, there is not that much to do in the typical deal – especially if you’re selling – so the team that does it can usually be small. The tax, intellectual property, environmental, real estate and other wrinkles that normally keep the broad teams in Big Law Firms busy on the deals they are well-suited to do are rarely present in the purchase and sale of small to medium-sized tech companies. While I was on Bay Street I routinely did up to approx $100 million deals with an associate (whom I used lightly) and a law clerk. And if I ever needed input from a specialist I asked for it – as I do now, if it ever comes up (which it almost never does). And more importantly, since then improving technology has made deals much, much easier to do.
For a variety of reasons, Big Law Firms are often exactly the wrong way to staff the purchase or sale of a small to medium sized tech business. (More and more clients are learning this, and it’s part of the reason large firms are having so much more trouble now addressing the SME market.)
So, what are the important characteristics of the right lawyer for these deals? Well, I think these are pretty important:
A. Has the bandwidth to make your deal the priority, and can make the deal a personal priority – not a priority for someone you’ve never met.
B. Genuinely understands your business and your priorities for the deal.
C. An effective process manager, with a very clear eye and common sense for priorities and for cost management.
D. A very effective communicator (willing especially to talk openly with you about cost).
E. Can negotiate intelligently and constructively, without undue emotion.
F. Understands the value of making the sale a positive experience for everyone.I think the right approach is to have a general business lawyer who is familiar with your business on a day to day basis and who can also handle the purchase and sale of a business. (The same analysis applies to venture capital and other financings, by the way).
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Client looking for acquisition opportunity
A client is looking to acquire Microsoft Virtual (VDI) / Remote Desktop (RDP) applications development and/or app development expertise. Ideally, a team of 8-12 developers, with a monthly burn of $50k (after revenue off-set). Value in the $500k-$1M range. If you have relevant info, please let me know.
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You have acquisition interest – now what?
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Links for Startups
Here are some links to useful information for startups. We add material from time to time so check back for updates.
